Business Valuations - Part 1

When a relationship breaks down, the parties must divide family property according to Part 5 and 6 of the Family Law Act (FLA).  Generally, family property and debt will be divided equally between the parties. If you or your partner owns or are a shareholder of a business, partnership or proprietorship, this is considered family property and will also have to be divided. However, it cannot be divided if the parties do not know or agree on the value of the business.  This is when the valuation of the business becomes appropriate.

The process of valuating your business can be confusing and overwhelming. The following blog provides a brief overview of business valuations in the family law context. This includes the different types of business valuations, the information needed for one, who conducts the valuation, and what you can expect from the process.

1. Does your business need to be valuated?

Because the business interests owned by a spouse is typically family property, the value of the interest is needed to determine how it can be divided or if a compensation payment is necessary to buy the other spouse out. Section 87 of the FLA states that the value of family property must be based on its fair market value. Depending on the type and complexity of the business, a full valuation may not be necessary to determine its fair market value, if the spouses agree to the value. A lawyer can help you determine whether a full business valuation, or a partial valuation is appropriate in your case.

There are other instances where the business may not need to be valuated, such as a situation where the spouses simply agree to divide the shares equally, in which the spouses do not technically need to know the value of the shares.

2. Who conducts the business valuation?

It is important when choosing a business valuator to ensure that they can provide a neutral position so their report can hold up in court. Due to this, we often advise against asking an in-house valuator such as the company accountant to provide a valuation for trial. However, in circumstances such as mediation or settlement outside of court, it may be appropriate. In family law, another aspect the court will look at is whether the valuator you have chosen is qualified as an “expert” in their field. If the valuator cannot show they are an expert, it is likely that the valuation provided will not have standing in court and you may have to start the process over again. If a specific expert has been qualified in court before, it is highly likely that they will be qualified in your case, so we often will research whether an expert has been named in any relevant cases.

Unless a court orders so, or the parties agree, it is the rule that the spouses must have a jointly appointed expert to do the valuation. According to Rule 13-4(1) of the Supreme Court Family Rules, the spouses must agree and put in writing:

-          Who the joint expert will be;

-          The specific issue(s) the expert evidence is addressing;

-          The facts which the expert will base their opinion on;

-          The timeline for preparation of the expert report; and

-          Who will be responsible for paying the expert’s expenses and fees.

If, after the joint expert provides their report, one of the parties disagrees with or believes there are mistakes, that party can either pay for a critique report to be tendered as evidence or apply to the court to have an additional, full expert report prepared. However, the party applying must show why an additional report is necessary, and simply disagreeing with the joint report will not be enough to do so.

3. What information and documents do you need for a business valuation?

Each business will have unique information required for a valuator to conduct a valuation, however, some information is universally needed, such as:

-          annual financial statements;

-          corporate tax returns;

-          breakdown of classes of shares if there are shares;

-          shareholder agreements;

-          appraisal of assets if there are any;

-          details of any previous offer to purchase the business if there are any;

-          contracts with customers and suppliers;

-          lease agreements; and

-          details of sales;

All other information and documentation needed will be requested by the valuator. It is also likely that the valuator will want to meet with management of the business, as well as the company accountant and financial personnel.

4. How is the business valuated?

There are multiple concepts of “value,” and therefore multiple approaches to valuing a business. In family law, valuations typically focus on determining the fair market value of the business. Fair market value is the highest price in which an asset would sell for under the current market conditions, with the assumption that the buyer and seller are seeking the best possible price. When determining the fair market value, the valuator also assumes that the sale is occurring in an open market and that no potential purchasers are prevented from the chance to purchase the asset. This assumption is made despite the fact that in reality, it is very rare for a market to be truly open.

The valuator will also take into consideration other important factors such as restrictions on sale of shares in the business, corporate taxes, and the difference in value of majority and minority shareholders.

5. What impact does the valuation have on property division in your family case?

The valuation can have different impacts on property division depending on the type of interest you have in the business, and how you wish to divide the interest between you and your spouse. For example, if the entire business is owned by the family, the entire value of the business will be divisible. However, if you or your spouse do not own all the shares, it is the value of the shares, rather than the entire value of the business that will be divided.

Additionally, the specific value of the shares is more important if one spouse is buying all or some of the shares from the other spouse. The amount can be added, or discounted from, and equalization payment owed by one spouse to the other. If the spouses are simply dividing the shares 50/50, an exact value may not be necessary.

Do you own all or part of a business and want to learn more? Please contact our team of Vancouver family lawyers for a consultation.